January 2009

Regressions of Multiples on Fundamentals: Market Wide

The following regressions were run across four groupings. The first and
most comprehensive set of regressions were run across all traded companies
in the United States. The second set of regressions were run across all traded
companies in Western Europe and the UK. The third set of regressions were
run across companies in emerging markets in Asia, Eastern Europe and Latin
America. The final set of regressions were run across just Japanese companies.

Using the regressions should be pretty straightforward, if you can get the
data on the independent variables for your company and stay true to decimal
format. (25% gets entered as 0.25). As an example, assume that you are
looking at Coca Cola in January 2009 and decide to use the US market regression
for price to book ratio. Here are the inputs:g = The analyst estimate of earnings
growth rate for the next 5 years is 7.4% (if you do not have analyst estimates,
substitute your own).
ROE =The return on equity last
year was 27.50%
Beta =0.70
Payout ratio = Dividend per share/ Earnings per share =
61%Using the PBV regression:
PBV for Coca Cola = 1.28
+ 6.72 (.074)+ 0.33(.61)-1.65 (0.70) + 8.67 (.275)

=
3.21

At its actual
price to book ratio of 4.85, Coca Cola is overvalued by about 33%.